Compound could be the digital asset that your financial portfolio is missing. However, before investing in Compound interest, you should be well-versed with the protocol’s business aspects. This will allow you to see where your money is going.
That’s why, before making a decision, we’ve highlighted all you need to know about Compound’s benefits and drawbacks.
What Is Compound?
Compound is an Ethereum-based decentralized lending platform that allows users to earn interest on their cryptocurrency investments. Lenders can invest in COMP, the Compound coin, by supplying ether or ERC20 tokens to the Compound system. Borrowers can use Compound to borrow ether or ERC20 tokens and pay interest in COMP. Ether (ETH), Augur (REP), 0x (ZRX), Basic Attention Token (BAT), USDC, DAI, and WITH are the seven assets currently supported by the protocol.
How Does It Work?
The following is how compound interest works:
- Make a deposit into a bank account. Compound interest can be earned by depositing money into a bank account or investment accounts, such as a high-yield savings account, money market account, or zero-coupon bond. If you invest in stocks that pay dividends, you can earn compound interest.
- Interest is paid on the deposit. The account will earn interest, which is usually calculated on a yearly basis. A $1,000 deposit into an annually compounded savings account with a 5% APY, for example, will grow to $1,050 at the end of the first year.
- The interest is compounded at the start. From the first year on, the APY pays interest on both the principal and the interest. The total interest would be $52.50 in the previous case. The total amount is $1,102.50 by the conclusion of the second year.
Compound Interest can be calculated in four different ways.
Compound interest can be calculated in a variety of methods, including:
- The compound interest formula is as follows: Compound interest can be calculated using a variety of mathematical formulas. The fixed formula, A = (PV(1+i)n – P, is one of the most straightforward methods for calculating interest. The final amount is “A,” the present value of the principal is “PV,” the interest rate is given as a decimal percentage is I, and the number of times the interest will compound is “n.” To calculate the annual return on investment, add one to the interest rate percentage, multiply the new % by the length of time, then multiply that amount by the present value. To get the compound interest rate, subtract the annual return from the principal.
- Calculate compound interest rates with a compound interest calculator. Many calculators, both hand-held and computer applications offer exponent capabilities that can assist you in calculating compound interest rates. There are additional free online calculators available, including one run by the Securities and Exchange Commission of the United States.
- Spreadsheets: Most spreadsheet systems provide a mechanism for calculating future values, which investors can use to calculate compound interest. The future value of a sum is the monetary value of a sum at a later date, and it can be used to estimate the future worth of a principle investment based on interest accrued and interest payments.
- The rule of 72: The rule of 72 is a simple calculation that divides the annual interest rate by 72 to find the number of years required to double an investment. For example, if the annual rate of return is 5%, an investment will double in 14 years (72/5 = 14.4).
Investing in a Compound has numerous perks. Among the benefits are the following:
Earn Interest on Your Cryptocurrency Investments
Because of the way the Compound protocol works, this is conceivable. You’re essentially giving borrowers a short-term loan when you lend them your assets. Borrowers must pay interest in the form of COMP in exchange for this loan. After that, the interest is deposited into the lender’s account.
Users can use the method to make passive income from their crypto assets without having to sell them. It’s a fantastic method to expand your crypto portfolio while keeping your money safe.
Minimum Deposit is Low
Compound has a low minimum deposit requirement, which is another perk. You simply need to supply a minimum of 0.001 ETH to the protocol to start collecting interest on your crypto assets. This is a little sum when compared to other loan services such as BlockFi (which requires a minimum deposit of 1 ETH).
Supports a variety of assets
Currently, the Compound protocol supports seven different assets. This allows customers to choose which assets to lend or borrow with a great deal of freedom. It’s also a huge benefit for consumers who want to earn interest in a variety of cryptocurrency assets. It implies you can use any of the supported assets to earn interest.
Rewards for COMP Tokens
When you use Compound, you’ll get COMP tokens as well. These tokens can be redeemed for cash back benefits or used to vote on governance proposals. Your benefits will be larger if you have more COMP tokens.
Platform for Decentralized Lending
Compound is a decentralized lending platform based on Ethereum. This means that it is not under the supervision of any central authority. Users benefit greatly from this because they have more control over their possessions. It also strengthens the platform’s defenses against censorship and fraud.
High Annual Percentage Yield
A high annual percentage yield is offered by compounding (APY). Ether’s current annual percentage yield (APY) is 8.92 percent, which is significantly higher than most typical savings accounts. This means that if you use Compound, you can earn higher interest on your crypto assets.
There are some drawbacks to utilizing compounds as well. The following are some of the drawbacks:
Compound is exposed to the same problems as other Ethereum-based platforms because it is built on Ethereum. This includes the possibility of theft and hacking. If you lend your assets to Compound, you run the chance of them being stolen by hackers. Holding your assets in a secure Ethereum wallet like MetaMask or MyEtherWallet will help you avoid this.
COMP Reward Reduction
There’s a chance you’ll lose money if you decide to redeem your COMP tokens for cashback benefits. This is due to the fact that the value of COMP coins is highly volatile and fluctuates frequently. You may lose money if the value of COMP tokens drops.
Fees that are too high
When compared to other loan platforms, Compound’s costs are quite expensive. The current fee for borrowing ether, for example, is 0.0375 percent. This means that if you borrow 1 ETH, you will be charged 0.0375 ETH as a cost.
Linked to the Ethereum Network
Compound also has the problem of being reliant on the Ethereum network. This means that if the Ethereum network is down, Compound will be offline as well. Users may lose access to their assets as a result of this.
Interest Rates That Vary
Compound interest rates are variable and vary frequently. As a result, the amount of interest you earn on your cryptocurrency investments can fluctuate dramatically over time.
Compound is an excellent way to earn income on your cryptocurrency holdings in general. It has a high annual percentage yield (APY), and a low minimum deposit requirement, and it accepts a variety of assets.
However, there are some hazards involved in utilizing Compounds. As a result, you should base your final selection on your risk tolerance and investing objectives.